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Why every adviser should learn about behavioural finance

Last year Tamsin successfully completed her masters in business management and financial planning. Here she discusses her chosen topic of loss aversion and why she believes behavioural finance is as crucial to financial planning as technical knowledge.

Tell us more about your masters degree

I concentrated on loss aversion and the theory connected with gambling – that if you lose a lot of money, rather than stopping taking risks, you actually take bigger risks to try and recoup your losses.

I read the theory and disagreed with it! From my experience if clients lose a huge amount of money what they do is run away from that and take fewer risks in the future. So I talked to other financial planners about what their experiences were, and to clients, and it appears that the education you get as a client from a financial planner stops you from making those sorts of rash decisions.

It would have been good to talk to non-advised investors and see if they follow the pattern of loss aversion – thereby showing the true value of financial planning. Perhaps I’ll do that as my PHD!

You’re already a chartered financial planner and fellow, why did you choose this masters?

For me the one area that none of the exams or certification cover is behavioural finance and it’s really important that as planners we understand it because it’s what leads our clients to make their biggest mistakes.

But there’s no CII exam on it and it’s not covered by the CFP certification because it’s not part of the recommendation process. It’s just something you need to try and understand, so it’s really difficult to get any knowledge in it, other than by reading.

Why do you think it’s so important?

Behavioural finance is about how human beings naturally respond to situations they’re put in. I think as a planner you have to understand how your clients are naturally going to react when they’re put in certain positions and educate them so they don’t necessarily follow their natural instinct.

It’s very easy to follow the herd – but if everyone starts ploughing money into equities because they’re heard they’ve gone up 50% that’s not very useful because they’ve already gone up by 50%. So understanding these phenomena means you’re better able to educate your clients.

In a way I think behavioural finance is almost more important than technical knowledge. Obviously you need the technical knowledge, but a lot of that changes. For example I did the CII exams in 2008 but pensions are completely different now. Technical knowledge can become quite out-of-date quite quickly. Obviously you use your CPD to keep that knowledge current, but actually to study something that won’t ever really date seems a lot more sensible to me.

What was the biggest challenge?

My biggest issue was with reading academic papers because they’re written completely differently to anything written in the real world. It’s a whole different language and way of writing. Mainly because you have to write in the third person, and read papers that are written in the third person. They also use words you’ve never come across and use a lot of statistical modelling.

I went to university and did maths and statistics, but still felt statistical modelling really hard to read. I imagine that someone who hasn’t got my background would find it even more difficult.

How did you overcome this?

I spent lots of time Googling words I didn’t understand! The more you read and write, the more used to it you get, but it’s a skill you develop. My course ran from February to December but included a lot of submissions to the university before the final dissertation. So the final paper was 15,000 words but I’d probably written 8-10,000 words before I’d got to that. And I’d read huge amounts of academic papers by that point also, which helped to get into it.

How much support did you get?

It’s a research degree rather than a taught degree, so there’s pretty much no teaching on your subject, but the course leader helps you to tighten up your focus. Quite often people like me are going into the topic blind and don’t realise how huge it is. You need to filter and concentrate your research down and the course leader helps you do that.

You’re not assigned an individual tutor until you start writing the dissertation though. Tutors aren’t paid a huge amount to spend time with you as an individual - just a few hours to give you support - so you’re pretty much on your own. There are six days at the university on the whole course, and the time was largely spent on guiding us on how to write rather than the topic itself.

Would you recommend it?

Absolutely. I think it would be good to have an optional behavioural module within the CII exams. But until that happens you can choose to focus this course on behavioural finance. It’s available to anyone in financial services or accounting. It’s pretty unique and hard work, but invaluable to what we do.

Smart Financial are running a training day in London on 24 February 2017 that will help you communicate the full value of the financial planning process. For more information click here.

For more support with training and development, why not take a look at illuminate learn?